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Growth prompts rates rise call

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The outlook for the world economy is probably the rosiest it has been for a decade, but interest rates will need to rise to stop it overheating, the International Monetary Fund says.

In its twice-yearly global score card, the IMF yesterday dramatically upgraded its forecasts for world growth, predicting booming conditions in the United States and Asia.

The optimistic tone was echoed by US Federal Reserve chairman Alan Greenspan, who yesterday sent financial markets scrambling after signalling that US interest rates could soon rise from the present 40-year low.

In a positive sign for Australian exporters - but with a possible sting for Australian home buyers - the IMF predicted strong global growth of 4.6 per cent this year and 4.4 per cent next year.

Six months ago it predicted world growth of 4.1 per cent for this year.

"The outlook for the world economy is among the rosiest we have seen in a decade," the IMF said. The US economy was tipped to grow 4.6 per cent this year and 3.9 per cent next year. China, Australia's fastest-growing export market, would grow 8.5 per cent this year and 8 per cent next year.

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In contrast to other developed economies, Australia's Reserve Bank raised interest rates twice at the end of last year to thwart soaring debt, the housing bubble, and possible inflation.

Reserve Bank governor Ian Macfarlane last week warned that low global borrowing costs could overheat the world economy and would need to be lifted.

The IMF suggested that with low unemployment pushing up wages and prices, interest rates in Australia should be lifted.

"Household spending is being underpinned by immigration, declining unemployment rates, buoyant housing prices and rapid growth of consumer credit," the IMF said on Australia and New Zealand.

But it warned that high oil prices or a terrorist attack could derail the global recovery.

The IMF left its growth forecast for Australia unchanged at 3.5 per cent this year, rising to 3.6 per cent next year. But inflation was upgraded to 2.6 per cent this year and 2.5 per cent next year.

Treasurer Peter Costello warned of challenges ahead for the world economy that would have to be carefully managed, including lifting world interest rates and reducing budget deficits in some countries.

Latest figures from the Bureau of Statistics and the Treasury show that soaring house prices pushed Australia's private wealth up by 17 per cent last year to $4622 billion. It was the biggest annual increase for 14 years.

If this wealth was shared across the population, every man, woman and child would get the equivalent of $231,000. Average debt per head was $18,100.

CommSec chief equities analyst Craig James said the 60 per cent rise in private wealth in the past five years had been equalled only once in Australia's history, in the late 1980s.

Oil prices have risen from $US26.50 ($A36.33) a barrel in September to $US34 ($A46.61) a barrel in mid-April, and futures markets point to a $US32.50 ($A44.55) average this year, meaning higher prices at the bowser.